INCLUDE COMMODITY TRADING IN YOUR PORTFOLIO

Commodity trading is a very good option to include in your portfolio. If you think you can guess whether the gold price will increase further, or the price of natural gas is going to fall, you can put some money at stake and trade in the commodities market. The history of commodity trading falls back to more than 6000 years when rice was traded in futures in China. Although the quality of the commodities and the method of trading were different, the ancient civilizations depended on commodity trading to flourish their business.
But in this age of technology, commodities are traded in multi-commodity exchanges, which are fully computerized. Even the stock brokers have set up commodity brokerages for ease in trading high volumes. And all this can be done online, which makes trading in commodities even more attractive. For example while buying gold bullions, you need to make sure the gold is pure and also ensure its safety while storing or transporting it. Whereas buying gold futures from an exchange gets rid of all such hassles. Retail investors who want to diversify their portfolios beyond shares, bonds or real estate, are participating in the trade of commodity derivatives. This was not possible some years back, as there was no retail avenue for commodity trading. But the advent of three multi-commodity exchanges has attracted retailers to trade in commodity futures.
Commodity trading relies on the simple economics of demand and supply. Lower supply results in higher price and vice versa. Hence the shortage or over-supply of any commodity has direct impact on the country’s economy. Investing in commodities is very different from trading in stocks or bonds or any other type of securities. Market demand, global development and technical advances affect the prices of commodities. The four general categories that the tradable commodities fall in are: Energy, Metals, Livestock and Agricultural commodities. Entities of commodity trading are categorized and have to be traded in some defined units only. This is because of the varied nature of the commodities.
Trading in precious metals can get nice returns for the trader, and comes in handy in times of currency devaluation or inflation. As the need for oil increases, the output is on the decrease. This leads to high prices of oil, and the investors speculate the energy demands and supplies or prices. Commodities can be very risky, as some affecting factors like natural or man-made disasters are near to impossible to predict or prevent from. Hence it is advisable to allocate only around 10% of your portfolio to commodities. Futures contracts and hedging are necessary with commodities due to its volatile nature.